VTB Says Khodorkovsky Case ‘Detrimental’ to Investors

The new sentence handed to Mikhail Khodorkovsky, the former head of Yukos Oil Co., may have
“unintended repercussions” for business in Russia, state-
controlled VTB Capital said.

Khodorkovsky, once Russia’s richest man, will probably
remain in prison for six years beyond an initial eight-year
sentence, after Moscow Judge Viktor Danilkin found him guilty of
money laundering and embezzling oil yesterday. Danilkin said the
former billionaire will serve a total prison term of 14 years.

“This court decision is much more detrimental to the
investment climate than the original tax fraud case,” Alexey Zabotkin and Aleksandra Evtifyeva, economists at VTB Capital in
Moscow, said in the note to investors today. “Unless overturned
by the higher court, this ruling could have unintended
repercussions that are more damaging than those.”

Investors pulled $9.5 billion out of Russia in 2004 partly
on concerns that then-President Vladimir Putin failed to protect
property rights. President Dmitry Medvedev, who has made it his
administration’s goal to combat corruption and attract foreign
investors to reduce Russia’s reliance on raw materials, said
this week that a top priority for 2011 is to improve the
investment climate.

‘Disturbing’ Rational

Khodorkovsky’s and Lebedev’s lawyers today filed a
preliminary appeal of his conviction on oil theft and money
laundering. The full appeal will be filed after the defense team
receives a copy of the verdict, expected in January, Karina
Moskalenko, one of Khodorkovsky’s lawyers, said today by phone.

The “most disturbing detail” was the court’s rationale
for the verdict, the VTB analysts said. Charges based on Yukos’s
use of internal transfer pricing, which redistributes cash flows
among units of a holding company, creates a precedent that
leaves other business open “to attack.”

U.S. and European government officials criticized the
conviction of Khodorkovsky and his former business partner Platon Lebedev, saying it weakened the rule of law in Russia and
would harm Russia’s image among investors.

“The opinions expressed there should not and cannot in any
way influence court decisions in Russia,” Foreign Minister
Sergei Lavrov said today.

Khodorkovsky, 47, has called the charges retribution for
political opposition to Putin. Previously due for release in
2011, Khodorkovsky will now remain in prison until after the
2012 presidential election that may return Putin to the Kremlin.
Putin has denied any involvement in the case.

No Connection

“There is no connection between the verdict and the
investment climate in Russia,” Putin’s spokesman, Dmitry
Peskov, said yesterday, declining to comment on whether the
trial and verdict were fair. “Thus we can hardly talk about any
potential influence on the investment climate.”

Seasoned investors in Russia expected a conviction and have
already priced it into the market, Chris Weafer, chief
strategist at UralSib Financial Corp., said in a note earlier
this week. “By the time Moscow’s markets start on Jan. 11, the
case will already be last year’s news,” he said.

The 30-stock Micex Index rose 0.6 percent yesterday to
1,687.99, bringing the year’s gains to 23 percent as it closed
for the New Year holidays.